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Investors Brace for a Downturn and Look to the Long Term

20.02.2019Company: BCG - The Boston Consulting Group

Investors believe that a recession is increasingly imminent. According to BCG’s tenth annual investor survey, conducted in October 2018, their 12-month outlook is considerably more negative than it was just a year ago. And many investors said that they are responding to the looming economic downturn by taking a more defensive, value-oriented approach to their investment decisions. To stand out from the pack and allay investors’ concerns, companies must take the right steps to prepare for and ultimately withstand significant economic headwinds without sacrificing long-term value creation.

BCG has surveyed investors every year since 2009 to understand their views on global equity markets and priorities for shareholder value creation. There were 260 responses to the 2018 survey. Approximately 80% of the survey respondents were portfolio managers, and 20% were buy-side and sell-side analysts; 48% focused on the US, while most of the others focused on Europe or invested globally. Collectively, these respondents directly manage more than $500 billion in assets and represent firms that manage $12 trillion to $15 trillion in assets. Here is what we learned.

SHORT-TERM CONCERNS INTENSIFY

Investors’ apprehensions about equity market conditions have increased significantly since the 2017 survey. (See “Increasingly Concerned Investors Seek Long-Term Value Creation,” BCG article, December 2017.) More than one in four respondents (27%) are bearish or extremely bearish about the market’s potential over the next 12 months, up from one in five (20%) in 2017. The decline in bullishness was even more pronounced. Only one-third (33%) of investors remain bullish or extremely bullish about the market’s potential for the next 12 months, down from nearly one-half (46%) in 2017.

The fact that the survey was conducted in October, when markets suffered heavy losses, likely affected investor sentiment. It appears that the responses foreshadowed the more dramatic losses through the end of the year and highlighted more fundamental concerns. Recession fears and high valuations have also undermined investors’ confidence. Nearly three-quarters (73%) of respondents said that they expect a recession within the next 24 months, up from about one-half (53%) in 2017. Two-thirds (67%) believe that markets are overvalued, in line with the share in 2017 (68%). In comparison, only 29% of investors in the 2016 survey said that they believe that the markets were overvalued.

Among self-described bears in the 2018 survey, nearly two-thirds (64%) cited market overvaluation as the reason for their pessimism. A number of other factors are contributing to the increasingly bearish sentiment. Nearly one-half (48%) of bears cited interest rates and nearly one-quarter (23%) pointed to concerns about global free trade and trade balances. Bears’ other macroeconomic concerns include public-sector debt and spending (23%) and European economic development in light of Brexit (20%).

In contrast, nearly half (45%) of the self-described bulls cited US deregulation and tax reform as a source of their positive outlook. Approximately the same share (41%) pointed to strong private-sector demand and consumption. Together, these responses highlight the great extent to which fundamental macroeconomic developments influence investors’ expectations in the context of today’s market conditions.

Reflecting valuation concerns, investor expectations for total shareholder return (TSR) remain at historically low levels. Survey respondents’ expectation for average annual TSR over the next three years was 5.6%. This almost exactly matches the TSR expectation level of 5.5% per year reported in our 2016 and 2017 surveys—the lowest level we have recorded since we began tracking TSR expectations in 2010. Respondents said that they anticipate that 4.3% of the 5.6% expected TSR will come from earnings growth, along with 2.1% from dividend yields and 1.2% from share repurchases. This implies a 2.0% expected average annual decline in valuation multiples over the next three years, and this, in turn, implies an approximately 1.3-point reduction in the S&P 500’s average P/E multiple over three years. As a result of recent market corrections, this valuation reduction has already materialized.

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